Inland Revenue’s recent report on high income earners has found that the effective tax rate (8.9%) for high-wealth individuals is low compared to that of middle wealth New Zealand (20.2%). The report has found that generally the wealthier you are, the less overall tax you pay as a percentage of your wealth. View a summary of their findings here.
For many, these research findings should not be surprising at all. This is because the wealthiest people in New Zealand tend to earn more through their investments, rather than their salary or wages. Though they pay a higher rate of tax on their personal income, (around 30% of their personal tax income vs. 21% for people on a median wage), they do not pay as much tax on the increasing value of the things they own – including businesses, property and investments.
One of the key reasons for this is that we do not currently have a capital gains tax in New Zealand (although there are other ways that capital gains are taxed, for example via the bright-line test). The wealthiest individuals in NZ are also more likely to hold their assets in trust, according to the report, which involves lower taxes.
The report gathered information from the 311 wealthiest families in NZ, who generally have a net worth of more than $50 million.
Sparking a debate in Aotearoa
Taxation is a highly contentious area, and Inland Revenue’s recent research is again reigniting important debate in Aotearoa, which will spike ahead of the 18 May Budget and October’s General Election.
All of this debate currently sits across a somewhat confusing context. Prime Minister Chris Hipkins clearly advised yesterday that there will be no capital gains or wealth tax in this year’s Budget. Given Inland Revenue’s findings are hardly surprising, this raises the question – why then was the research initiated?
Merit in Inland Revenue’s research certainly can be derived by it stimulating valuable discussion around some fundamental taxation questions: What should a progressive tax system look like? Is the tax system broken, or are we seeing a change in taxing philosophy? Should we have rules that protect sovereignty and tax overseas investors more than local? Should there be more encouragement to save and perhaps provide tax relief at source? These are all important questions that not only our political parties, but all New Zealanders will have to grapple with as we move through the rest of the year and beyond.
More commentary to come
Watch out for our Budget commentary on May 18, where we’ll be taking you through all of the key Government spending announcements and how it will affect your business as soon as the Budget is released. You can sign up to be the first to see our Budget commentary here.